Marketron Games:  Self-Propelling Stocks vs Dumb Money and Metastable Dynamics of the Good, Bad and Ugly Markets

42 Pages Posted: 24 Mar 2025

See all articles by Igor Halperin

Igor Halperin

Fidelity Investments, Inc.

Andrey Itkin

New York University (NYU) - NYU Polytechnic School of Engineering

Date Written: January 21, 2025

Abstract

We present a model of price formation in an inelastic market whose dynamics are partially driven by both money flows and their impact on asset prices. The money flow to the market is viewed as an investment policy of outside investors. For the price impact effect, we use an impact function that incorporates the phenomena of market inelasticity and saturation from new money (the dumb  money effect). Due to the dependence of market investors' flows on market performance, the model implies a feedback mechanism that gives rise to nonlinear dynamics. Consequently, the market price dynamics are seen as a nonlinear diffusion of a particle (the marketron) in a two-dimensional space formed by the log-price x and a memory variable y. The latter stores information about past money flows, so that the dynamics are non-Markovian in the log price x alone, but Markovian in the pair (x,y), bearing a strong resemblance to spiking neuron models in neuroscience. In addition to market flows, the model dynamics are partially driven by return predictors, modeled as unobservable Ornstein-Uhlenbeck processes. By using a new interpretation of predictive signals as self-propulsion components of the price dynamics, we treat the marketron as an active particle, amenable to methods developed in the physics of active matter. 

We show that, depending on the choice of parameters, our model can produce a rich variety of interesting dynamic scenarios. In particular, it predicts three distinct regimes of the market, which we call the Good, the Bad, and the Ugly markets. The latter regime describes a scenario of a total market collapse or, alternatively, a corporate default event, depending on whether our model is applied to the whole market or an individual stock. 

Keywords: inelastic market, money flows, , price impact, market regimes, market crashes, corporate defaults, metastability

Suggested Citation

Halperin, Igor and Itkin, Andrey, Marketron Games:  Self-Propelling Stocks vs Dumb Money and Metastable Dynamics of the Good, Bad and Ugly Markets (January 21, 2025). Available at SSRN: https://ssrn.com/abstract=5107305 or http://dx.doi.org/10.2139/ssrn.5107305

Igor Halperin (Contact Author)

Fidelity Investments, Inc. ( email )

United States

Andrey Itkin

New York University (NYU) - NYU Polytechnic School of Engineering ( email )

Brooklyn, NY 11201
United States

HOME PAGE: http://https://wp.nyu.edu/andreyitkin/

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